Brazil: New Export Devices In Brazil

Proposed in 1988, under a statute which was never actually implemented, the idea of Export Processing Zones (ZEP in the Portuguese acronym) just received a new opportunity in Brazil through a new Federal Law (Lei nº 11.508, of July 20, 2007). Heavily vetoed by the President, the bill expressed the regional interests of some legislators and shall probably offer some competitive advantages to foreign investors seeking export platforms in Latin America.

As originally conceived, the ZPE would create a special environment protected against the complex exchange and tax rules then prevailing in Brazil. Those barriers were in due time removed from the overall economy and the new edition of ZPEs would not therefore enjoy from such a competitive advantage as they were to be in 1988. In fact, the vetoed portion of the new bill assures that only a marginal distinction would benefit the firms operating from ZPE. A new Executive-introduced provisional measure (or immediately-enforced Congress bill) would assure that this marginal benefit actually exists.

Three relevant aspects ensure that ZPE might interest investors. Although tax and exchange rules would not significantly differ from Federal standards, applicable nationally, local and state advantages could influence the micro-localization of investments already earmarked to South American or Brazilian placements. Therefore, land grants, public-sponsored utilities, exemption from local real estate and other taxes, etc., would most certainly result from the election of an area as ZPE. Certainly this is more a politically motivated move from local Administrations than the result of the new Federal law, but Brazilian Tax Law assures that a bargained-for tax advantage, paid up by investments by tax-payer cannot be withdraw before the assigned term.

The second aspect is that, as evidenced by economic research, if general investment incentives do not make sense, those favoring micro-localization do. If local charges mean 10% of your cost, the assurance that placing your plant in a ZPE would prevent such costs to happen for a number of years may influence the foreign investors that had already decide to build a plant somewhere in South America to pick a Brazilian ZPE within a beautiful environment rather than other locale. The fact that a Federal recognition of a ZPE would justify the state and City sponsored improvement of local infrastructure would also have some weight.

The third element to be considered is that the new law ensures that 20% of the ZPE production may be sold at the Brazilian market. Even though such special zones do not necessarily benefit from MERCOSUR access, the entry to national market may be nice custard in an otherwise attractive bundle.

Once a ZPE is established and operating, a further advantage could be envisaged. Transaction costs, a very serious problem in Brazilian economy, are contained by the local and state interest. Community motivation is usually raised in larger projects like a ZPE or the quite successful petrochemical zones operating for decades in Brazil and the joint front of ZPE investors create significant momentum to be continuing dialog with Government. Trade associations are central players in Brazilian economy.
If the plants located in ZPE have as target the production of technology-heavy items (biotechnology on Brazilian-advantage inputs, like ethanol, is an easy example) then the new zones may enjoy from real tax incentives. Innovation tax benefits assured by recent legislation are fully enjoyable by ZPE industries, and such incentives are compatible with the top similar devices offered by OECD countries and somewhat further. Members of this firm have worked on the ZPE legal issues since 1988, and have assisted the Federal Government in the recent innovation incentives introduced in the last 4 years, including some aspects of the Semiconductor technology package in force since January.

The ZPE certainly should attract attention from investors, especially as no transfers from existing plants located elsewhere in Brazil are allowed. As Brazilian biotechnology is a relevant aspect to be considered, ZPE plus innovation incentives may weight the balance. If new industrial projects are intended, and Brazil is a possibility, ZPEs may be the significant inducement to decide the location.

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